Higher materials costs, labor shortages and a shortage of lots were expected to detract from builder sentiment, but didn’t have much impact.

NAHB Chief Economist Robert Dietz commented:

The HMI measure of future sales conditions reached its highest level since June 2005, a sign of growing consumer confidence in the new home market. Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.

The home-related exchange-traded funds, SPDR S&P Homebuilders ETF (XHB) and iShares U.S. Home Construction ETF (ITB) both were more than 1% higher by 11 a.m. Monday.

Michael Shaoul of Marketfield Asset Management writes:

Given that this period is right at the heart of the key spring selling season the strength of confidence is an encouraging metric that suggests that recent activity has been brisk, and with activity still well below historical averages the odds of high confidence being a contrary indicator is remote at present.

Data released today shows that new-home sales appear to have rebounded from a December decline, though not as well as expected.

The Commerce Department said Friday that sales of newly built single-family U.S. homes climbed 3.7% in January from December to a seasonally adjusted annual rate of 555,000, missing the 567,000 expected by economists.

Home prices are growing at more than twice the rate of inflation and increases are likely to continue, said David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices. A likely Federal Reserve rate hike in December should not deter those improvements. Read More »

U.S. Treasury prices inched lower Wednesday after the release of strong housing data suggesting a rise in demand for new homes.

The yield on the benchmark U.S. 10-year note, which rises as prices fall, climbed to 2.537%.

The yield on the two year note climbed to 0.582%, while at the long end of the curve, the 30-year Treasury bond edged up to 3.248%.

MarketWatch reports:

Analysts said assessments of the Fed’s intentions after a kneejerk selloff in the wake of last week’s statement by the central bank remain a market driver. The market has yet to fully reflect the Fed’s forecasts for future interest-rate rises, with investors instead keeping watch on economic data.

On the economic front, new home sales surged to a six year high, rising 18% in August to a seasonally adjusted 504,000, according to government data released today. Economists expected sales to climb to a 435,000 annual rate from 412,000 in July.

The Treasury will sell $35 billion of five-year notes today. This follows the sale of $29 billion of two-year notes Tuesday at a yield of 0.289%.

Cleveland Fed President Loretta Mester, a 2014 voting member of the rate-setting FOMC, is scheduled to speak at 12:15 p.m. Eastern, while Chicago Fed President Charles Evans is delivering a speech at 1 p.m. Evans will be a voting FOMC member in 2015.

Bonds are taking it easy Friday following their eye-popping rally of the past several days. The 10-year note is down 3/32 in price, lifting its yield – which hit a 6-month low 2.473% yesterday – back above the 2.5% mark at 2.512%, per Tradeweb data. The 30-year note, however, is still finding a way to press a bit higher, gaining 3/32 to yield 3.333%, up from an 11-month low 3.302% at midday yesterday.

The take-away from the housing starts and building permits data for April is a theme of multifamily focus and the increase of families deciding to rent instead of buy. This developing trend has led to a steady decline in home ownership to 64.8%, down from the long term average of 65.4% and the 2004 peak of 69.2%. The increase in focus on the renters market has been the driving force behind the +2.5% y/y increase in housing costs reflected in the CPI report and the +2.6% y/y in OER residence costs.

While the bond market weakened and equity futures rallied as the starts and permits data gives the appearance of a better than expected housing market data, in truth the theme needs to be about a sustainable pace in single family starts and permits which would signal the current impediments of strict lending standards and inventory shortages were beginning to clear which would support a steadily improving housing market that would help promote a quickening pace of GDP growth in 2014.

Treasuries are starting off this week on the wrong foot after the National Association of Realtors reported that pending home sales rose by 3.4% in March, marking the biggest monthly gain since May 2011. It might mark the start of the long-awaited spring thaw for economic data, or it could just be the beginning of yet another week of strong data one day followed by weak data the next, keeping Treasuries range-bound. Like last week, when the Census Bureau reported that new home sales slipped. In any case this week’s data may take on an air of greater significance since the Federal Reserve’s next policy committee meeting starts tomorrow.

The ten-year Treasury note is down 9/32 in price so far today, per Tradweb data, lifting its yield to 2.699%, and the 30-year bond is down 26/32 to yield 3.183%.

Here’s Omair Sharif, U.S. economist at RBS, with his take on the housing data:

The increase provides the first glimmer of better news in housing in some time, and it is especially encouraging as we head into the all-important spring selling season. This rise bodes well for the April existing home sales report, which will be released on May 22.

The pending home sales index had posted eight straight declines from July 2013 to February 2014, falling by 15% in that span. The steady drops in the second half of 2013 were due in part to the backup in rates, while more recent drops were attributed in part to the harsh winter weather. However, there have also been concerns regarding still-tight mortgage credit, a waning of demand due to decreased affordability, and a lack of inventory. Today’s result suggests that, at least in March, homebuyers shook off the winter blues and concerns about affordability and jumped back into the housing market.

That being said, this is a 3.4% rise in the context of a 15% decline that lasted for 10 months, so we still have a ways to go to reach prior levels. For example, on a y/y basis the pending home sales index was down 7.4% in March. For the most part, home sales have essentially been flat on an underlying basis (i.e. the six month average) since last summer (and actually more like early 2013 when you look at only existing home sales). In any case, pending home sales increased in all regions except for the Midwest, which saw a 0.8% drop.

Can the mortgage-bond market stand on its own two feet? That’s a good question, and one the Federal Reserve will learn the answer to in short order.

Bloombergreported today that Fed buying of those securities, which helped fuel a housing recovery, is poised to fall below growth in the $5.5 trillion government-backed market as soon as May. And investment pros say private demand will be needed to offset supply.

Next month, issuance of the types of bonds the central bank is buying is expected to overtake its purchases for the first time since November.

Bloomberg reports:

Last year, the Fed added twice as much of the debt as was created, suppressing yields that guide mortgage interest rates. The balance is shifting as the central bank steadily scales back its support of the U.S. economy at the same time home buying approaches its peak season. That creates a new challenge for a housing market that policy makers have been seeking to prop up since it crashed six years ago and threatens to inflate borrowing costs. Investors already are on edge over a Fed statement last week that fueled speculation it may raise short-term interest rates sooner than forecast.

Inventors worry that the housing market is losing momentum. Pending home sales data released today by the National Association of Realtors unexpectedly slipped 0.8% in February, pushing the index 10.5% below its year-ago level. And with the January index revised down, pending home sales have fallen for eight consecutive months.

Colder-than-normal weather probably played a role in the drop, and some say that may reverse as warm weather spurs demand. But prospective buyers also faced rising mortgage rates, higher prices and limited supply of cheaper properties.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.